Inventory Financing

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How much are you looking for?

Loan Amounts

$25,000 – $10,000,000+

Terms

Revolving Credit

Rates

Starting at 7.25%

Speed

24 – 48 Hours

Benefits to working with SMB Compass

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Successful track record of supporting entrepreneurs
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Free consultations to discuss financing options
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5 Star Customer Reviews
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Over $250 million delivered to 1,250+ businesses
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25+ years of business lending expertise
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Flexible and low cost options available

What is Inventory Financing?

Inventory financing is a type of asset-based lending that relies solely on the inventory that a business can offer, including current and future inventory, as collateral to secure a loan for inventory purchasing. With asset-based lending programs, businesses can utilize other assets, in addition to inventory, or just use standalone inventory in order to secure financing. Businesses that are in B2B, or business-to-business industries are able to use inventory, accounts receivables, and equipment as collateral, whereas B2C, or business to consumer industries will only have inventory or potentially equipment available to offer as collateral. In either case, using the inventory that a business has available as collateral for a loan can help a business owner improve their cash flow for operating expenses or growth opportunities.

The amount of money that a business can borrow against their inventory varies depending on the industry that the business is in, the inventory churn, and the type of inventory that they have to offer as collateral. It is common for businesses to work with inventory in three separate categories: raw materials, works in progress (WIP), and finished goods. While all three types of inventory have value and are assets on the balance sheet, not all types of inventory are appealing to inventory lenders, and not all types will secure enough financing for working capital needs. The key component to evaluating the value of the inventory that a business has in stock is going to be the ability for a third party to sell that inventory in the event that the business is not able to pay back the loan at any point during the terms of the deal. Raw materials are generally very easy to liquidate, which makes this type of collateral an appealing form of inventory for inventory lenders to consider for collateral. As long as there is a market for the sale of the inventory products, finished goods inventory can be an attractive form of inventory to use as collateral to secure inventory financing. However, work in progress or WIP inventory is usually not valuable to asset-based lenders or inventory lenders. This is normally the case because work in progress inventory is usually sold for just the melt-down or material value of the products, which could be valued at only pennies on the dollar, depending on the type of product. Business owners can learn more about inventory financing programs by speaking with a Lending Advisor today!

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What are the benefits of Inventory Financing?

Like all forms of asset-based lending, inventory financing is a great way for business owners to unlock cash that is otherwise sitting on their balance sheets. Valuable inventory provides asset-based lenders with comfort when cash flow alone can’t support a business loan. Especially for business owners that keep their shelves stocked with valuable inventory or experience a high turnover for their inventory, inventory financing provides an additional funding option for business owners that need a boost in working capital. Smart business owners know how to utilize multiple financing products and funding plans in order to maximize the efficiency and working capital available at any given moment. By capitalizing on inventory financing for inventory purchasing, additional funding options and credit lines remain open and are available for future use. The liquidity provided by inventory financing gives an added amount of flexibility to businesses.

A major benefit of inventory financing is that the terms of this type of lending product are frequently structured as revolving lines of credit. This means that principal and interest payment are due when inventory churns or is sold and as payments are made on the loan balance, the amount of money available goes back up. Having an inventory line of credit will provide business owners with the ability to unlock tied up cash and not make any amortizing payments. Without monthly payments, business owners that take advantage of inventory financing have an immediate increase in cash flow by capitalizing on their valuable inventory, whether it is the inventory currently sitting on their shelves or the inventory that they will buy in the future.

Another benefit of inventory financing is for businesses that frequently need to buy new inventory, but run into cash flow shortages. By capitalizing on inventory financing, business owners can make expensive inventory purchases, using the value of the new inventory itself as collateral to secure the funding. Once that inventory is sold, the business can pay back the money owed to the lender. This allows business owners to keep their shelves stocked with the inventory they need to maintain their business operations, even when cash flow is short.

How does Inventory Financing work?

Because the value of the inventory that a business wants to purchase acts as the collateral to secure funding for the inventory financing itself, the inventory itself is the asset being used to back the borrowed funds. Although this opens the doors for many business owners that might not qualify for other traditional loan options, it does often make the process to apply for inventory financing document-intensive. Specifically, there is a substantial amount of documentation required to evaluate the inventory and determine how much money will be available for the specific inventory items. Often, a lender that offers inventory financing will use field audits and inventory valuations as a part of the funding process. The field audit is an important component of inventory financing, as this process determines the final approval and funding availability will be for their inventory financing line of credit. During the field audit, the lender, or a representative on their behalf, will visit the location of the inventory in order to evaluate the value of the collateral that will be used to secure the funds. This audit will determine how much money the lender will offer for the inventory as collateral, usually based on the amount that the inventory could be sold for in the event that the borrowing business cannot repay the funds. After the reports are received and the final approval is issued, typically the borrowing business is able to borrow up to 80% of the appraised value of the inventory.

The first part of the underwriting process consists of the lender reviewing financial documents from the borrowing business. Some of these documents include: Profit and Loss statements, Balance Sheets, A/R and A/P Aging report (accounts receivable and accounts payable), inventory reports, business tax returns, and future projections. Once these documents are received by the lender and a business is approved for inventory financing, the borrowing business will receive a term sheet to outline the inventory loan amount, the advance rate, interest rate, and any associated fees. When the borrowing business owner accepts and signs the term sheet, they will have to make a deposit for a field audit and diligence, which begins the process to evaluate the inventory and determine the amount that can be borrowed.

What type of collateral is used for Inventory Financing?

Typically, inventory is the main asset used as collateral to secure funding from a lender for inventory financing. The type of inventory that a business has to offer, the ease of liquidation of that particular type of inventory, and the location of the inventory all play a major role in determining the advance rate or LTV for an inventory loan. For example, if a company that manufactures its own jewelry were using the jewelry that’s a finished good as the collateral to secure funding for inventory financing, they might receive a 30% LTV from a lender, which is not considerably high. The reason that the LTV is low in this example is because the jewelry is already a finished product, the materials most likely will not be reusable, so there is less value in the product from a liquidation stand point. However, a steel manufacturer that holds raw steel as inventory that can be used in different ways by different businesses might receive a 65% LTV, because the raw material is more likely to be resold or liquidated than finished products. From a lender’s perspective, the faster, easier, and higher value that they can sell the inventory pledged as collateral, the higher the value they will assign and the more money they’ll advance to a borrowing business’ inventory.

What are the rates and fees for Inventory Financing?

Inventory financing rates and fees are dependent on a variety of different factors. The first factor that affects rates is the enterprise risk or credit profile of the borrowing company. Basically, the more of a financial risk that a business is considered, the harder it will be for them to qualify for any type of financing. Businesses with stronger credit history demonstrate that they are more likely to pay back the borrowed funds and are more likely to be approved for inventory financing. Next, the lender will determine the value for the type of inventory being offered for collateral by assessing the advance rate that they can offer. The more valuable the inventory, the more money that a business can borrow. Lenders will typically also consider the size of the borrowing company and the amount of money they expect to borrow from the inventory lender. Lenders are not likely going to give larger amounts of money to smaller companies unless they can demonstrate very strong credit history and financial growth. Typically, when determining the rates and fees for inventory financing, lenders will consider the following factors: profitability; cash flow; business credit; personal credit; tax and lien history; inventory churn; diversity of customer base; and quality of the inventory.

Profitability

One of the first factors that a lender will consider about a borrowing business is the profitability associated with the borrower. Businesses that can demonstrate high profit margins and a consistent income from sales will have an easier time qualifying for inventory financing. Basically, if a business has a higher profit margin than their business expenses, they should be able to qualify for inventory financing.

Profitability refers to the net profit that a business can demonstrate. Net profit compares all business expenses to all income, or how much over the break-even point a business can demonstrate their profits are bringing in. Profitability is important when applying for inventory financing because businesses that can demonstrate that they are profitable are more likely to be able to make the payments agreed upon in the terms for the inventory financing. If a business cannot demonstrate profitability, the lender might not have confidence that the borrower will be able to make payments, and in turn they will increase rates and fees.

Cash flow

In addition to profitability, borrowing businesses that can demonstrate stable cash flow levels will have an easier time qualifying for inventory financing. Cash flow refers to the amount of working capital that a business has on hand at any given time, which can often demonstrate a business’s health. Cash flow demonstrates to a lender that a business has the funds necessary for their operating expenses, and by displaying healthy cash flow, lenders will have confidence in the borrower, which will make the lender more likely to qualify them for inventory financing.

Business Credit

Another important factor in determining rates and fees associated with the terms of an inventory financing agreement is the business credit of the borrowing business. Like with all lending options, businesses with a poor credit history signal to the lender that the business is a risky borrower. Lenders do not like to loan money out to risky borrowers, and the riskier a business is, the higher the rates and fees associated with the terms will be, if they are even qualified for the product. A healthy business credit report demonstrates to the lender that a business consistently keeps up with their debt and their payments, which gives lenders confidences and increases the likelihood of a borrower qualifying for inventory financing.

Personal Credit

In addition to the business credit history, lenders will often evaluate the personal credit of the borrowing business owner. Sometimes it is not enough for a lender to see that the business credit history is strong. If the business credit is healthy, but the personal credit of the business owner is weak, a lender might not qualify the borrowing business for inventory financing. Lenders will want to see that the borrowing business owner has healthy credit in addition to the credit history of their business in order to have confidence that they will pay back the money owed.

Tax and Lien History

Another important factor that might determine the rates and fees associated with the terms in an inventory financing agreement is the tax and lien history that a borrowing business can demonstrate to a lender. If there is no tax or lien history, or the borrowing business can demonstrate that they paid off all taxes and liens, the borrowing business will have a higher chance of being qualified for inventory financing. If there are outstanding tax and liens owed, a borrowing business will likely not qualify for inventory financing.

Inventory Churn

Because the inventory is used as the collateral to secure the funds for inventory financing, the nature of the inventory itself will play a role in determining the rates and fees associated with the terms of the inventory financing agreement. Specifically, the inventory churn, or turnover rate associated with the inventory, will play a role in determining the terms of inventory financing. By considering the levels of inventory turnover, the rate of the goods sold, and the rate of purchasing inventory, a lender will determine the value to place on the inventory being used as collateral.

Diversity of Customer Base

Another important factor that lenders will consider with inventory financing is the diversity of the customer base that a borrowing business can demonstrate. Businesses that can show a reliable, consistent, diverse customer base are more likely to qualify for inventory financing with favorable rates and fees. On the other hand, businesses with limited customers or homogenous customer bases might have a harder time qualifying for inventory financing with various lenders. When applying for inventory financing, borrowing businesses will have to demonstrate their relationships with their customer base to the lender.

Quality of Inventory

In addition to the turnover of inventory and the rate of sale, the actual inventory that will be purchased itself will play a major role when determining the terms of inventory financing agreements. Specifically, the quality of the inventory plays a key role in determining the value of the inventory to a lender – the more the inventory is worth, the more the lender will offer for inventory financing. However, other factors related to the inventory itself will play a key role – like the location of the inventory (where it is stored), the ease of access to the inventory, the type of inventory, and how old the inventory is. If the inventory being purchased has a high value that will retain over time, lenders will offer more money for inventory financing applicants.

FAQ About Inventory Financing

What is inventory financing?

Inventory financing is a specific type of asset-based financing or funding product that allows businesses to secure financing through the value of a business’ inventory to make inventory purchases. This type of funding helps the cash flow of a business by freeing up existing working capital that was being used to purchase and hold inventory. This potential to add liquidity allows businesses to capitalize on the value of their inventory. Instead of using up their working capital for inventory, businesses that take advantage of inventory financing capitalize on the value of the inventory used to keep their shelves stocked.

How do you qualify for inventory financing?

The determining factors that influence the qualifying status of a business for inventory financing are the industry that the business is in and the type of inventory that is being pledged as collateral. Lenders need to determine the value of the inventory in the event that the borrowing business is not able to pay back the loan and the inventory needs to be sold to a third party. The value of the inventory that will be purchased itself is usually what the lender uses as collateral to secure the funds – the higher the value of the inventory being used for collateral, the more money that the borrowing business will receive from the lender.

How long does the application process take for inventory financing?

Although the application process may require a surplus of documents, the timeframe to secure inventory financing is typically not very lengthy. The timeframe is often dependent on the preparation of the applicant business, if the business owner has the necessary documents readily available, the application process will usually be much quicker. Recently, with the increase of Internet services that offer inventory finance options, finding the right inventory financing loan is easier than ever. One factor that might influence the speed of application decisions is the type of inventory being purchased. The inventory lender must complete a field audit to assess the value of the inventory, the time frame might be extended before the borrowing business obtains a decision.

How would you use inventory financing?

Businesses use inventory financing to free up cash flow that is held up via inventory that has yet to be sold. This type of financing is especially beneficial for businesses that turn over high quantities of especially valuable inventory because it allows businesses to receive funds immediately based on the value of the inventory on their shelves and the inventory they are attempting to purchase for the future. Inventory financing is used to cover different expenses that may arise and allows business owners to take advantage of new business opportunities by providing an influx of working capital immediately.

Is collateral required for inventory financing?

Yes, inventory financing is a specific asset-based lending product. The collateral required for inventory financing is the inventory that the loan is being secured with. The type of inventory being used as collateral and the liquidation cost of the inventory both play a large role to determine the necessary collateral.

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